The Zacks Transportation - Air Freight and Cargo industry is dominated and defined by package delivery majors like FedEx Corporation (FDX - Free Report) and United Parcel Service (UPS - Free Report) .
Apart from companies that provide air delivery and freight services, some industry participants focus on offering specialized transportation and logistics services.
The companies not only operate a ground fleet of multiple vehicles, but some of these maintain air fleets as well. These focus on offering air transportation services for passengers and cargo. Some companies also render their services to entities that outsource air-cargo lift requirements.
Here are the three major industry themes:
- Major industry players have significant exposure to China’s economy, which is not in good shape. Reportedly, China’s economic growth in 2019 was the weakest in nearly 30 years mainly due to the prolonged trade tiff with the United States. Evidently, FedEx reported lower-than-expected earnings and revenues in second-quarter fiscal 2020 (ended Nov 30, 2019) on account of a weak global economy due to the trade tensions among other factors. Even though the situation pertaining to the trade war might improve in the ongoing year, particularly owing to tariff relief following the signing of the U.S.-China Phase 1 trade deal in January, the coronavirus outbreak has again complicated matters for China.
- With most industry players investing significantly to upgrade their facilities following exponential growth in e-commerce demand, their bottom lines are strained due to escalated capital expenditures. For instance, UPS’ capital expenditures (adjusted) were $6.5 billion in 2019, bulk of which was directed toward new technology, aircraft and automated capacity. This reflects a massive increase from 2016 levels, when the company’s capital expenditures were nearly $3 billion. UPS expects capex to be even higher in 2020 ($6.7 billion). This is expected to dent 2020 earnings per share by roughly 33 cents.
- The impressive balance sheets of most major companies in the space have helped engage in shareholder-friendly activities. Robust free cash-flow generation by these companies is a positive and will likely lead to an uptick in shareholder-friendly activities. For instance, UPS expects adjusted free cash flow for the ongoing year to be between $4.3 billion and $4.7 billion. The mid-point of the guided range is higher than the prior-year reported figure.
Zacks Industry Rank Indicates Dull Prospects
The Zacks air freight and cargo industry, housed within the broader Zacks Transportation sector, currently carries a Zacks Industry Rank #213. This rank places it in the bottom 16% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates lackluster near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for 2020 has moved 19.1% south.
Despite the bleak near-term prospects of the industry, we will present a few stocks that investors can retain given their growth prospects. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector & S&P 500
The Zacks Airfreight & Cargo industry has lagged the broader Transportation sector as well as the Zacks S&P 500 composite over the past year.
Over this period, the industry has declined 9.6% compared with the broader sector’s appreciation of 2.7% and the S&P 500 Index’s rise of 21.1%.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the trailing 12-month EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is a commonly-used multiple for valuing transportation stocks, the industry is currently trading at 8.64X compared with the S&P 500’s 11.36X. It is higher than the sector’s EV/EBITDA ratio of 7.83X.
Over the past five years, the industry has traded as high as 12.98X, as low as 8.19X and at the median of 9.58X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Though the surge in online shopping is a positive for industry participants, we believe players in the industry will struggle in the short term mainly due to exposure to the Chinese economy, which is in doldrums and elevated capital expenses. Moreover, technological failures like the TNT Express cyberattack at FedEx in 2017 have the potential to cripple operations.
Overall, the industry might not be able to tide over these challenges in the near term and therefore, none of the stocks in the industry currently holds a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .
We are presenting three Air Freight and Cargo stocks with a Zacks Rank #3 (Hold).
Based in Atlanta, UPS is the world's largest express carrier and package delivery company. The Zacks Consensus Estimate for the next-year EPS has been revised 0.5% upward over the past 30 days.
Price and Consensus: UPS
Air Transport Services Group (ATSG - Free Report) is headquartered in Wilmington, OH. The company provides air-cargo transportation and related services to domestic and foreign air carriers, and other companies that outsource their air-cargo lift requirements. The Zacks Consensus Estimate for the next-year EPS moved up 1.3% over the past 60 days.
Price and Consensus: ATSG
Atlas Air Worldwide Holdings (AAWW - Free Report) is a provider of outsourced aircraft and aviation operating services. The Zacks Consensus Estimate for current-year EPS moved 3.1% north in 60 days’ time.
Price and Consensus: AAWW